FUTURE-PROOF THE ELECTRICITY MARKET DESIGN

Marcel Cailliau EURELECTRIC

Vice-Chairman of EURELECTRIC Markets Committee

Brussels, 1st December 2015

A level playing field for all resources, in all markets

2

Conventional generation

Renewables

Storage Demand

Response

Decentralized generation/ Prosumers

Competition in

the market

On a level playing

field

To provide

energy, flexibility,

capacity

Customers’

participation and

empowerment

3

Operational integration through:

• Responsibility of generators for:

- Selling in the market (directly or via aggregators)

- Balancing (costs of imbalances)

• Same obligation for all generators for:

- Grid connection / usage (fees)

- Dispatch / Grid access (no priority)

Ensuring operational integration of RES

Operational and commercial integration of RES is necessary, both in the

market and grid aspects

Commercial integration through:

• State Aid Guidelines provide a framework for

RES support schemes

• The evolution from Feed-in Tariffs to Feed in

Premium is a first step towards more market

oriented support schemes

RES load factors vary greatly (Germany, year 2014)

A new paradigm for European electricity systems

In Germany, end 2014 wind and solar

achieved over 35GW of power while

the minimum is <5GW.

The range of uncertainty is around

30GW while peak demand is around

90GW

4

Power systems with broad generation variations from intermittent renewables

need both firm capacity (“back up”) and flexibility resources

.

Variable

RES

Flexible resources

Back-up capacity

Security of supply

Make sure that customers participate through demand response

in all markets including in capacity markets

Source : PJM – « 2015 Demand Response Operations Markets Activity

Report » (May 2015) 5

Day-ahead/ Intraday markets/ Balancing

Example from PJM capacity market in the US

A capacity market is an additional market place

where both demand and supply can compete

What does a capacity market do?

€/MWh

Years

€/KW/y

Years

Energy-only market: uncertain scarcity revenues

Capacity market transforms uncertain scarcity revenues into a more stable revenue stream

Plant revenues in the capacity market

In energy-only markets part of the investment costs

and fixed costs of power plants are recovered through

uncertain price spikes in situations of system stress.

A capacity market transforms this “scarcity element”

into a more stable revenue stream that remunerates

the availability of the needed capacity.

It reduces the risk profile of generators, storage

operators and demand response providers and reduce

the capital cost.

* As in the EURELECTRIC price study, Assumes 40:30:30 energy/networks/taxes & levies shares

6

Enabling consumers’ participation with demand response

7

Increasing taxes & levies in customers’ bills hamper their ability to

respond to energy prices

Other limiting factors include:

Lack of smart meters Lack of dynamic pricing Lack of market access

A future-proof market design

ENERGY

• Efficient dispatch

• Forward, day-ahead, intraday markets

• Ongoing market integration

FLEXIBILITY

• Short term system adequacy

• Day ahead, intraday and balancing , ancillary services

• Ongoing market integration

CAPACITY

• Long term system adequacy

• Capacity market

• National initiatives…going towards more integration?

A FUTURE PROOF MARKET DESIGN VALUES THE NEEDED ENERGY, FLEXIBILITY AND CAPACITY

8

Energy and flexibility: Implement no regret options

9

Integrated forward,

intraday, day-ahead markets

Efficient balancing and

ancillary services markets

Improved design of

balancing and intraday markets

Future proof market environment for flexible assets,

storage, demand response

Many European countries have moved ahead with capacity mechanisms

10

How do member states ensure security of supply?

Energy-only market

Implemented Capacity market

Strategic reserve

Under analysis

Outside the EU,

IE & NI: Capacity payments since 2007

GB: Centralised capacity auction

BE: Strategic reserves

SE: The government has proposed to prolong the strategic reserve until 2025

LT: capacity payments since 2011 until end 2015

RU: capacity market with price restrictions. Long-term capacity supply agreements for obligatory investments

PL: operational and strategic reserves

HU considering reserve

IT: centralized capacity mechanism with Reliability options to be implemented

DE: Improved EOM and strategic reserves

ES: Capacity payments for new units (level of support reduced in 2012)

PT: Capacity payments for new units (reduced in 2013)

FR: Decentralised capacity obligations

Capacity payments

Reliability Option

DK: one-off tender

Strategic Reserve

for eastern Denmark

RO: Capacity Market?

GR: Centralised capacity auction for capacity/flexible capacity under consideration

FI: strategic reserve contracts for the period 2015-2017

Key step: System adequacy assessed at least at regional level

11

Close cooperation among involved TSOs, NRAs and governments

Analysis of the location of “firm capacity”

System adequacy assessments should also include economic viability checks

Is this the right approach?

To maximise cost-efficiency and market orientation,

any capacity mechanism should follow a set of fundamental design features

• Security of supply

• Remunerate availability/firm capacity, demand response, storage

• Market-based • Technology neutral: generation/demand response/storage • Open to new/existing plants

• Open to cross-border participation, and ideally common sourcing at regional level

Objective

Product

Geography

How?

12

Capacity markets should ensure that only the capacity strictly needed for long-term

system adequacy is maintained or delivered.

They should not provide a safeguard for poor investments or power plants that are not

competitive.

Backup

The completion of the Internal Energy Market is fundamental to accomplish this

transition in power systems in a cost-efficient way

14

All market developments head towards completing the Internal Energy Market

Implementation of the Third Energy Package Integration of wholesale markets across all timeframes

2030 Framework for Climate and Energy Agreed Headline Targets

- 20%

Greenhouse

Gas

Emissions

at least

- 40% Greenhouse

Gas

Emissions

20% Renewable

Energy

20% Energy

Efficiency

at least

27% * Renewable

Energy

consumption

*implies 45%

RES in power

mix

at least

27% (indicative)

Energy

Efficiency

*to be reviewed

by 2020, having

in mind an EU

level of 30%

2020

2030

10% Interconnection

15% Interconnection

15

Over 150GW of solar and wind installed in

10 years Low carbon generation leading the way (EU 28, 2013)

The growth of renewables, which is necessary to pursue the European

targets, brings a new reality to power systems.

The total electricity production in 2014 amounts to

3025 TWh, RES contributing to this total with 28%.

16

A new paradigm for European electricity systems

EU Cumulative wind power installed capacity

EU Cumulative PV installed capacity

Sources: EWEA, Solar Power Europe

CCGTs revenues fell drastically CCGT load factors decrease (2009-2013)

A new paradigm for European electricity systems

There is increased market uncertainty for all market players

Source: GlobalData

17

€/MWh

Source: Crédit Suisse Utilities Big Book: H1 2015

Gas plants

Coal plants

Hours

18

Meeting the security of supply challenge

Desired level of

security of

supply politically

determined

Uncertainty in

terms of

frequency and

sustainability of

price peaks: lack

of visibility

Government

interventions

hindering

scarcity prices

(price caps)

Support schemes

that distort the

energy price

signal and

dispatching

decisions

Reliable investment signals

that value capacity availability

needed

Source: Poster in Brussels metro station 19

Meeting the security of supply challenge